Appetite for Risk Finally Slows in China as Default Rises

“(Reuters) – Some of China’s struggling firms are finally getting the reception that regulators have been hoping for – a cold shoulder from banks in the form of smaller and costlier loans.

Reuters has contacted over 80 companies with elevated debt ratios or problems with overcapacity. Interviews with 15 that agreed to discuss their funding showed that more discriminate lending, long a missing ingredient of China’s economic transformation, has become a reality.

Up against a cooling Chinese economy and signs that authorities will not step in every time a loan goes bad, banks are becoming more hard-nosed and selective about whom they lend to.

There are signs that even state-owned firms, in the past fawned over by lenders for their government connections, have to contend with higher rates, lower lending limits and more onerous checks by banks.

“Interest rates are going up 10 percent for the entire industry,” said Wang Lei, a financedepartment manager at PKU HealthCare Corp (000788.SZ). “Obtaining loans is getting difficult and expensive.”

PKU HealthCare, which is controlled by Peking University and makes bulkpharmaceuticals, has struggled to remain profitable. Its debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) ratio exceeded 60 at the end of September, four times the average for listed Chinese companies from the sector.

To be sure, several companies with strong balance sheets and profits reported no significant changes in their funding conditions.

That in itself is a welcome sign that banks are finally differentiating between the strong and the weak, more aware that they are on the hook for losses if businesses fail.

“It was a wake-up call for lenders,” said Christopher Lee, managing director and the head of greater China corporate ratings at Standard & Poor’s. “There is no such thing as a risk-free investment.”

That marks a painful, but necessary shift for the world’s second biggest economy to fulfill Beijing’s ambition to cut wasteful investment and secure more balanced long-term growth.

For household goods maker Elec-Tech International Co Ltd (002005.SZ), less credit is the new reality. Its bank cut its borrowing limit by 500 million yuan ($80.79 million) to no more than 2.5 billion yuan this year, said Zhang, an official at Elec-Tech’s securities department.

“Last year, the bank gave us a discount on our interest rates. This year, we probably won’t get any discount,” Zhang who declined to give his full name said. “It feels like banks are not lending and their checks are becoming more rigorous.”

“STRATOSPHERIC DEBT LEVELS”

Some gauges of China’s corporate debt are already flashing red.

Non-financial firms’ debt jumped to 134 percent of China’s GDP in 2012 from 103 percent in 2007, according to Standard & Poor’s.

It predicted China’s corporate debt will reach “stratospheric levels” and become the world’s largest, overtaking the United States this year or next…..”